How Lloyds’ advisers clashed with HBOS’s at 3am and nearly scuppered Brown’s rescue

October 18th, 2008

Last weekend, two brawling investment bankers nearly brought down the entire capitalist system.

As the finishing touches were being put on the “Brown bailout” — which involves the nationalisation of three of Britain’s banks and whose supposed success has caused a spring in Gordon Brown’s step in recent days — well-padded bankers from Merrill Lynch and Morgan Stanley came close to torpedoing the whole thing.

According to a detailed piece examining the negotiations that lead to Brown’s extraordinary display of taxpayer munificence to failed banks, written by The Times’ Francis Elliott and David Wighton, the whole plan nearly hit the buffers after two investment bankers disagreed about some of the details.

According to the article, after intense negotiations last weekend between the Treasury (led by Baroness Shriti Vadera, minister in the department for business, and Paul Myners, minister for the City, but also with input from treasury officials Nick Macpherson, John Kingman and Tom Scholar) and the banks (led by their chief executives Sir Fred Goodwin, Andy Hornby and Eric Daniels but with input from a clutch of investment bankers and lawyers), agreements in principle were reached shortly after midnight on 12th October.

Here I quote from Elliott and Wighton’s article:

However, just as exhausted officials, lawyers and politicians drifted off into the early hours of Sunday morning, a deal-breaking row broke out between two crucial advisers at 3am.

Merrill Lynch’s Matthew Greenburgh, who was advising Lloyds TSB, violently disagreed with Simon Robey at Morgan Stanley (for HBOS) over the interpretation of several key clauses of their merger deal.

With less than five hours to go before the London markets opened Paul Myners, the City Minister, was faced with having to wake Mr Brown and Mr Darling to tell them that a global humiliation was looming.

He decided to leave the pair to argue between themselves in a corridor. Finally at 6am — with the fate of the world’s financial system hanging in the balance — Mr Greenburgh backed down.

Who knows what they were arguing about. But it’s possible that Greenburgh, chairman of Merrill Lynch’s financial institutions group and a former trusted adviser of Sir Fred Goodwin, was anxious that Lloyds’s shareholders might be getting a bad deal, due to the terms of the bailout or the way the takeover of HBOS had been structured.

For reasons that remain unclear, the government is currently insisting that HBOS will only be eligible for a bailout if it succumbs to a takeover by Lloyds TSB.

I know that, thanks to the incompetence of chairman Lord Stevenson and the apparent immorality of its entire, the Edinburgh-based bank is a basket case that has zero chance of survival as an independent bank. But why should its shareholders be prevented from seeking an alternative owner, given that the Lloyds deal is extremely negative from a Scottish jobs perspective, and would harm consumers by recreating the oligopoly in UK banking?

I wouldn’t be surprised if Greenburgh would have preferred to have steered Lloyds clear of the humiliating notion of part-nationalisation altogether.

Maybe the Merrill Lynch banker is concerned that Lloyds shareholders would have to make do on a dividend free diet for a period of up to five years, while preference shares are repaid (a scenario that would clearly cause Lloyds’s share price to collapse even further, as high yield funds sold their shares in droves)?

Greenburgh must, surely, have recognised that this aspect of the government’s bail-out package would be harmful to Lloyds shareholders’ interests. The barney might also have revolved around draconian conditions which the government claims it will impose on Lloyds, in exchange for the bank being granted immunity from competition law if it does “merge” with HBOS.

Perhaps we’ll never know. However whatever its subject, the verbal sparring between the two merchant bankers seems to have lasted fully three hours, from 3am and 6am last Sunday/Monday.

Greenburgh has had quite a distinguished career. He recently pocketed a bonus of some $11 million for advising RBS, Fortis and Santander on their €71bn takeover of Dutch bank ABN Amro (apparently Merrill Lynch became RBS’s lead adviser to RBS after Goldman Sachs realised the deal would be disaster).

Presumably Greenburgh believes it’s perfectly okay to trouser this obscene sum – even though the deal destroyed at least three of the four banks concerned and played a part in tipping the global recession into recession?

Greenburgh — who advised Clara Furse at the London Stock Exchange on how to repel her repeated suitors, and the former building society Northern Rock on how to survive financial meltdown — presumably still believes he deserves the money.

Marginally less is known about Morgan Stanley’s Robey, although the fact managed to persuade Lloyds to pay anything at all HBOS is suggestive of sales skills on a par with those of Mr. Wormwood in Roald Dahl’s Matilda.

Robey also advised successfully Marks & Spencer on repelling the advances of the buccaneering billionaire Sir Philip Green, has a passion for singing (he is chairman of the Royal Opera House, Covent Garden) and was once given T-shirt with the words “Get This Right or I’ll Kill You” printed on it by his Morgan Stanley colleagues.